By Pat Holohan
Global consulting giant McKinsey created a new division in 2010 with a focus on companies in distress. Nearly a decade later, McKinsey Recovery & Transformation Services has been forced to disgorge millions of dollars in fees it has earned from its work in bankruptcy cases – and to spend millions more defending itself – as Alix wages a personal campaign to change the way it does business.
Alix, the founder of fellow restructuring advisory titan AlixPartners, has spent the past three years pursuing McKinsey in courts throughout the US, telling a half dozen judges that McKinsey knowingly and habitually concealed conflicts of interest while advising bankrupt companies. McKinsey argues that its disclosures have always complied with the law, and that the disclosure rules laid out by the Bankruptcy Code leave room for interpretation.
“Mar-Bow is taking an extreme position of the rule and saying, ‘It’s this way, and if you don’t do it my way, you’re committing fraud,’” says McKinsey counsel Maria Ginzburg, of Selendy & Gay.
But since Alix took his battle public in 2016, McKinsey agreed to pay $15 million in a settlement of its disclosure issues with the US Trustee Program, the government’s bankruptcy watchdog. Late last year, McKinsey agreed to pay another $17 million to the litigation trust of SunEdison despite only making $15 million in fees during its work on the case. Finally, as part of the settlement with the US Trustee Program, McKinsey has filed new protocols that would change the way the firm makes disclosures going forward.
“When I looked at [McKinsey’s disclosure declarations] I saw that unlike every other professional whose disclosure declarations I had seen in almost 30 years on the bench, McKinsey’s disclosures did not disclose the identities of any of their connections,” Steven Rhodes, a retired bankruptcy judge who oversaw Detroit’s restructuring and is now counseling Alix, told Debtwire. “And that, quite frankly, shocked me. It was clear to me that that was a violation of Rule 2014 of the bankruptcy procedures which requires disclosure of connections. I couldn’t believe that McKinsey’s employment had been approved in those cases.”
Alix, who retired from the company he founded in 2000 but returned as a board member in 2012 and still owns a third of the company’s equity, is not ready to let up, and continues to battle in four bankruptcy cases and a Racketeering Influenced and Corrupt Organizations Act (RICO) suit in New York District Court. But he has suffered losses recently, and whether he has worn out his welcome remains to be seen.
In April, the US Supreme Court declined to hear Alix’s appeal of a bankruptcy court order in the case of Alpha Natural Resources that allowed McKinsey to privately disclose its connections to the judge instead of making them public. In May Alpha Judge Kevin Huennekens declined to reopen Alpha’s bankruptcy case, determining that Mar-Bow did not have standing to pursue its claims.
The bankruptcy judge for Westmoreland Coal Company, where McKinsey filed its new disclosure protocol, said the fight could be a “career-ender for somebody.” If what Alix says is true, then McKinsey has committed fraud, Judge Jones reasoned. If Alix is lying, he’s committed perjury.
With that matter to be heard this summer, McKinsey said it is continuing to try to improve its disclosures.
“We want to stay ahead of this and this is our effort to try and say, ‘How do we stay at the cutting edge and in sync with where the trustee is in the context of an evolving philosophy around disclosures?’” McKinsey Senior Partner Bob Sternfels said. “And we’re doing our best around that and that’s the spirit that we’re trying to take.”
Pat Holohan is a senior reporter with Debtwire. He can be reached at [email protected]